FocusChina DAP duty reflects global food shortage

09 April 2008 13:01[Source: ICIS news]

LONDON (ICIS news)--Reports the Chinese government may increase the export duty on phosphate fertilizersto 80%, or even impose an outright ban to alleviate a chronic domestic shortfall, is symptomatic of a wider issue of global food security, sources said on Wednesday.

As rice prices hit record levels, prompting major exporters like ?xml:namespace>India, Vietnam and possibly Pakistan to curtail exports and shore up domestic food supplies, China also needs to shore up its food supply and support farmers in its still largely agricultural economy.

Any decision to raise duties would tighten an international fertilizer market which could see Chinese supply reduced dramatically but may not stem the flow of the product out of the country completely.

In China, officials were meeting today to decide the government’s response to latest reports domestically produced diammonium phosphate(DAP) and nitrogen, phosphorous and potassium (NPK)-blended fertilizers were ending up in the hands of Chinese traders for export to the international market.

Enterprising Chinese traders were sidestepping the ban on the movement of railcars containing fertilizers to the ports by either trucking cargoes to the port or using the river system. These smaller cargoes were going under the radar of the central government.

“The government can control rail transport but not the river system or trucks,” said one Chinese producer.

Earlier in March, the government decided to move 300,000 tonnes of phosphate fertilizers from southern areas to the northeast of the country where most consumption takes place.

One Chinese producer put the volume diverted away from the domestic market at around 100,000 tonnes of DAP and NPKs.

The duty has already been revised on one occasion with the level on DAP and MAP rising to 35% in February, and there were rumours that it could be raised to 45% in March.

The policy had some success. Exports of MAP in February were just 33,000 tonnes, compared with 225,000 tonnes in January and DAP exports were down to 101,000 tonnes from 215,000 tonnes the previous month.

But at least two Chinese producers said it was still more lucrative to sell to regional markets like Thailand and Vietnam.

The Chinese government had imposed a ceiling domestic price of CNY4,100/tonne ($586/tonne) ex-warehouse. In contrast, international DAP prices were fast approaching $1,200/tonne FOB (free on board) from key US and North African sources.

“If the international price tops $1,200/tonne FOB, the government won’t hesitate to increase the export duty,” said one producer.

“The trouble is,” the producer added, “that there are absolutely no stocks of DAP in the domestic system.”

The domestic spring season was facing one of its worst shortages in living memory. Estimates put the shortfall at 1.5-2m tonnes due to substantial exports in 2007 of DAP and MAP totalling nearly 4m tonnes as Chinese producers took advantage of record-high international prices.

The problem was exacerbated in January and February when heavy snowstorms wreaked havoc with power grids supplying fertilizer producers. The Chinese Phosphate Industry Association estimated that up to 500,000 tonnes of DAP/MAP production was lost as a result.

However, even the expected 80% export duty would not completely stem the flow of exports, some producers said.

“Exports will continue,” said one producer. “There will be pressure to stockpile [in the close season] from the government.”

“However, in one month the spring season will be over but state-owned producers have to keep producing. Chinese export prices have to keep track with the international price,” the producer said.

Another producer agreed. “Of course, a total ban would be a disaster,” he said. “But I don’t believe the government can do that,” he added, referring to China’s membership of the World Trade Organisation (WTO) which could make such a decision contrary to the terms of its membership.

The other factor was rapidly increasing sulphur feedstock costs of $720-750/tonne CIF (cost, insurance and freight), which could force DAP producers to recoup some of these costs through exports.

Some Vietnamese traders reported that the decision to raise the duty had already been made and that the new duty would come into effect from 20 April.

Another rumour circulating late on Wednesday in China was that the tax would be raised, effective 1 May, and would last for 12 months.